RPT-COLUMN-Dollar drop on politicized Fed may be part of Trump deal: Mike Dolan

By Mike Dolan

LONDON, Aug 28 (Reuters) - The world needs to brace itself. U.S. dollar losses on an unraveling of Federal Reserve independence may not simply be the fallout, it's likely the intention.

Donald Trump's daily bashing of the U.S. central bank this year has left little doubt that he intends to exert greater political influence over the Fed than any president since the 1970s.

His legally contentious move to fire Lisa Cook from the Fed board over allegations of mortgage fraud - based on loans taken out before she even joined the Fed - has been read by most people as a pretty clear attempt to create another vacancy on a seven-person board where members have long 14-year tenures.

If successful in dismissing Cook, Trump would secure a majority of apparent loyalists on the board next year - two are already in place, another position is in the process of being filled by his economics advisor Stephen Miran, and then there's the replacement for brow-beaten Chair Jerome Powell, whose seat is up for grabs in May.

Not only is Trump filling the board with like-thinking economists, but there are reports he is also seeking ways to shape the re-appointment of regional Fed bosses who make up the rest of the monetary policymaking council. These 12 Fed Presidents serve rolling five-year terms but all 12 come up for reappointment in February and the Fed board needs to approve them.

What does Trump want to do with the Fed? One of the president's publicly stated aims is getting interest rates down more than three percentage points to 1% - a move that would likely have a pretty dramatic downward impact on the dollar if even halfway successful.

But it's widely accepted the administration wants what it sees as a still over-valued dollar to depreciate further to help rein in U.S. deficits and reinvigorate U.S. industry - something Miran has written about extensively and Trump has publicly sympathized with.

It's likely a feature rather than a bug of its re-politicizing of the central bank.

EXECUTIVE OVERREACH

In a note to clients on Tuesday, strategists at Jefferies said the Cook dispute "exemplifies the expansion of executive power," which may open the path for the administration to oust Powell or other regional Fed presidents, raising risk for U.S. assets.

"The risk of non-renewal or dismissal of regional presidents — especially those perceived as policy dissenters — has become material," the analysts explained. They argued that "this emerging dynamic" was underscored when standing Trump board appointees Michelle Bowman and Christopher Waller abstained in the vote to appoint former Barack Obama adviser Austan Goolsbee to run the Chicago Fed back in 2023.

Echoing many investors, Jefferies noted that markets have remained calm despite the unprecedented public political interference in the workings of the Fed. But they also pointed out that the sustained political pressure could erode confidence in its independence over time, potentially leading to higher inflation expectations and upward pressure on yields.

The steepening of the 2-to-30-year yield curve is already well underway, hitting its most extreme level since early 2022 as markets price in sharp cuts over the next year and rising long-term inflation expectations.

Arguably, that's the worst possible mix for the greenback, which has already lost almost 10% this year against a basket of currencies .DXY, as the steepening yield curve reduces both short-term yields and long-term purchasing power.

U.S. firms could potentially view the combination of an easier Fed and weaker dollar as a boon - as this could make U.S. goods more attractive overseas while juicing U.S. growth. But the mix would be cold comfort for foreign investors in Wall Street equities, particularly if a further 10-20% depreciation is in the works.

And for countries around the world, the prospect of another sharp dollar plunge raises all sorts of conundrums, not least how a weakening U.S. currency may compound the hit from Trump's tariffs.

While the foreign central bankers who gathered in Jackson Hole last weekend wrung their hands about the global implications of a loss of Fed independence, none mentioned the potentially seismic fallout from what could effectively be a dollar devaluation - let alone how monetary policymakers may battle the related deflationary effects on their own economies.

And many investors still appear to view recent and potential dollar weakness as some sort of collateral damage from compromising Fed independence, policy uncertainty and a loss of confidence in general.

But they are likely underestimating the chance that this is all part of the plan and will thus be welcomed - indeed pursued - with gusto by the White House.

The opinions expressed here are those of the author, a columnist for Reuters

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